LCCs take large stake in Asia Pacific

 - January 28, 2010, 4:11 AM

Low-cost carriers (LCCs) in the Asia-Pacific region have made “huge inroads in a relatively short time,” according to the Centre for Asia Pacific Aviation (CAPA). This market penetration has occurred despite somewhat restrictive regulations in some places and government tendencies to favor full-service flag carriers.

In contrast to the major network operators, which focus on long-haul and international services, LCCs have concentrated on providing links between regional centers. Combined with their low fares, this strategy has substantially expanded the market, claims CAPA in an October 2009 report. “They have been able to do this largely under the radar of the main carriers with their hub focus and emphasis on medium- to long-haul routes,” the report states.

Airbus has confirmed that LCCs have boosted the region’s air transport industry.

“Deliveries to Asia Pacific are expected to increase with the growing low-cost presence and demand from emerging markets, stimulated by progressive deregulation. LCCs are expected to develop their single-aisle fleets quickly from a relatively low base of 340 [in 2009] to more than 1,470 by 2028,” said the manufacturer, which also has observed a trend toward longer range LCC operations in the region.

More Growth for LCCs
LCC developments have taken Asia Pacific full-service carriers (FSCs) by surprise, suggests CAPA, which reports, “Without exception, they believed their renowned low seat-cost, widebody capability would counter even the improved narrowbody costs of the new entrants. They had not factored in the opportunities [for LCCs] to fly new routes and to offer frequency on existing routes and new aggressive forms of pricing, nor that governments would quickly see the political and economic benefits they could stimulate.”

Asia Pacific LCCs have captured 14 percent of a regional market that is as big as European or North American domestic markets, according to Airbus. But similarity in size is not reflected in respective performances, the report indicates. Airbus market analysts say LCCs have a greater than 40-percent share in five of the top 10 domestic Asian markets, more than their Western counterparts.

The analysts also report that extensive growth saw more than 30 Asia-Pacific LCCs achieve 19-percent traffic increases between 2007 and 2008, with the five leaders contributing more than two thirds of that growth. This does not mean that demand has been satisfied, however. Indeed, Airbus reports LCCs are “basically nonexistent” in China and Japan, the region’s two largest domestic markets.

The European manufacturer sees continuing opportunities for more widespread LCC operations, with potential for new services and market entrants, but warns that success is not certain and casualties will occur. “The number of [Asia-Pacific] LCCs should remain stable,” the report says, while Airbus expects operators to grow domestically by increasing market share and benefiting from regional economic growth.
But, overall, development has not been entirely smooth. “LCCs have had mixed results in Asia generally–with slow growth, losses and failures countering some spectacular success stories,” said CAPA. “The main impediment to expansion has been conservative regulatory regimes, with protectionism still prevalent [and] with slow progress in northeast Asia and China, in particular.”

In other parts of the region, liberalization or deregulation continues, with Association of Southeast Asia Nations (ASEAN) member states moving toward
so-called “Open Skies.” LCCs also are gaining ground in India. High-profile Malaysian operator AirAsia has established medium-haul international services and is exploring longer range markets throughout Asia Pacific, as well as to other continents.

Altogether, the CAPA report identifies almost 50 LCCs in the subregions of north, northeast, south, and southeast Asia; southwest Pacific; China; and Oceania. CAPA analysts say regulations governing formal entry into international Asia-Pacific markets remain “restrictive.”

Implementation of a planned ASEAN multilateral liberalization agreement is progressing only slowly, but if fully adopted will provide Open Skies in the subregion by 2015. The phased introduction provides stepping stones toward greater regional deregulation; for example, Malaysia (with AirAsia and AirAsia X) and Singapore (with Jetstar Asia and Tiger Airways) dropped restrictions last year.

With four LCCs–Batavia Air, Citilink, Indonesia AirAsia and Mandala Airlines–Indonesia has been an enthusiastic domestic participant, but only recently has become less resistant to international access. Vietnam–home to LCCs Indochina Airlines and Jetstar Pacific–has developed a “booming and large” domestic market in the past three years, according to CAPA.

‘Unparalled Expansion’
By 2009, more than 50 percent of domestic Australian services were low-cost operations, while neighboring New Zealand–the region’s low-fares pioneer–has two LCCs flying nose-to-nose against flag carrier Air New Zealand.

Among South Pacific nations an “especially significant turnaround” has seen island flag  carriers that have experienced heavy losses defer to joint-venture LCCs or embrace international operations from larger nearby countries, says the report.

CAPA describes south Asia’s Indian LCC market, where most entry requirements have been removed, as enjoying “unparalleled expansion,” moving from 4-percent penetration six years ago to greater than 50 percent in 2009. In the three years to July 2007, India’s domestic market grew by an impressive 150 percent. In fact, at more than 45 percent, the subregion has the world’s highest LCC market penetration.

Northeast Asia has made the least progress toward deregulation, according to CAPA. A “vibrant” domestic market notwithstanding, central control of pricing, distribution, fuel, aircraft purchases and many other operational areas means that China “effectively prohibits” LCCs from competing.

Elsewhere in the region, LCC development is challenged by South Korea’s “powerful incumbents,” which enjoy influential market control and political support, and by high costs and major-carrier dominance in Japan, the report says. CAPA indicates that Japanese regulators are trying to support moves toward Open Skies among Japan, China and South Korea.

Fledgling LCCs have been set up in each country, but face competition from “very efficient and subsidized fast rail” services. Also, new LCCs initially are required to fly only domestic routes before receiving approval for international flights, which CAPA says gives FSCs an opportunity to set up low-cost subsidiaries. For example, a restructuring of troubled Japan Airlines could include a subsidiary LCC that, in turn, could be met by a similar development at competitor All Nippon Airways, which has an LCC on the back burner.

The three countries have begun to permit inbound LCC services from Southeast Asia, which is said to be influencing consumer behavior and could accelerate change. CAPA believes LCCs in northeast Asia are best advised to develop regional services, if approval can be obtained from Chinese, Japanese and south Korean regulators. “While LCC activity may lag in the short term, when barriers are reduced, the [LCCs] are likely to rapidly establish themselves in the international market in northeast Asia, if not beyond,” the CAPA report claims.

Airbus has identified an LCC appetite for international operations, saying their intra-Asian capacity rose “a stunning 37 percent” in 2008, as markets such as Singapore-Kuala Lumpur were opened to them. But that route evidently is exceptional, since flights between other ASEAN points accounted for only 8 percent of their local market.

In contrast, ASEAN traffic to countries outside the economic zone has increased by 67 percent, stimulated by increased deregulation established mainly through bilateral agreements. “For example, LCC traffic among ASEAN countries and between ASEAN countries and South Korea [is] expected to average 10-percent [annual growth] over the next 20 years,” the manufacturer predicts. According to Airbus, 40 percent of such extra-ASEAN flights involve routes of more than 2,000 nm, taking them outside the LCCs’ traditional areas.

Long-range Battle Brewing
As LCCs ventured further afield, some operating beyond 2,000-nm have adopted larger, often widebody, designs. Airbus reckons 20 percent of overall international traffic in the region flies such distances, and that by 2028 almost 250 new Asia-Pacific routes, including more operators on current city pairs, will have been added, one in four greater than 2,000 nm long.

“LCCs are likely to grab a significant share of this traffic, while developing [longer] operations,” suggested Airbus. “[Their] growth will continue to offer people in Asia Pacific an opportunity to reap the benefits of air transport through new routes and more affordable travel, as well as helping to drive world traffic growth to its projected highs,” according to the manufacturer.

CAPA foresees a new long-range battleground between old and new airline business models: “Extension of LCC networks over longer distances and their increasing presence at [Asia-Pacific] hub airports means that direct competition [against FSCs] will be a greater issue. The challenge for governments is to allow this competition to drive innovation and investment among [all] carriers.”